Stern Educational TV, Inc., has decided to buy a new compute
Not what you're looking for?
Stern Educational TV, Inc., has decided to buy a new computer system with an expected life at three years at a cost of $200,000. The company can borrow $200,000 for three years at 12% annual interest or for one year at 10% annual interest.
a. How much would the firm save in interest over the three year life of the computer system if the one year loan is utilized, and the loan is rolled over (reborrowed) each year at the same 10% rate? Compare this to the 12%, three year loan.
b. What if interest rates on the 10% loan go up to 15% in the second year and 18% in the third year? What would be the total interest cost compared to the 12%, three year loan.
Purchase this Solution
Solution Summary
Stern Educational TV, Inc., has decided to buy a new computer system with an expected life at three years at a cost of $200,000. The company can borrow $200,000 for three years at 12% annual interest or for one year at 10% annual interest.
a. How much would the firm save in interest over the three year life of the computer system if the one year loan is utilized, and the loan is rolled over (reborrowed) each year at the same 10% rate? Compare this to the 12%, three year loan.
b. What if interest rates on the 10% loan go up to 15% in the second year and 18% in the third year? What would be the total interest cost compared to the 12%, three year loan.
Solution Preview
a. $200,000 borrowed × 12% × 3 years =
$72,000 interest cost (long-term)
$200,000 borrowed × 10% × 3 ...
Purchase this Solution
Free BrainMass Quizzes
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.